Major Cycle*(Long-term trend lasting several months to years) Positive

* Cycle status is based on S&P 500.

It’s true that there’s nothing like higher prices and new highs in a bull trend to engender talk of even higher prices and more new highs. But knowing that just because new highs are created is not reason enough to begin heading for the exits. That apparent conflict is the basis of our current conundrum as we attempt to give definition to a contest in which the winning team continues to move up the field with only marginal resistance. It’s a fact the goal line will eventually be reached to the extent a major high is made, but so far that goal remains uncertain.

Admittedly, we thought this bull market would end before now. Following the May 2011 index highs and the subsequent failure of our key indicators to confirm new price strength in the move that began in March 2009, we thought the negative divergence between the two would eventually cause the market to tip over in favor of the indicators. Obviously that hasn’t happened for the most part. But what has occurred recently is that some of our indicators like the Most Actives Advance/Decline (MAAD) series have begin to show some renewed strength with MAAD finally bettering its spring 2011 highs.

Market Overview – What We Know:

More buying and more new highs characterized price action in major indexes last week. Value Line index, up 2.15%, was biggest index gainer.

All cycles (Minor, Intermediate, and Major) remain positive, but short-term volatility has moved back into zone of vulnerability.

Daily and Weekly MAAD rallied to best levels since March 2009 last week, but both time series remain well below 2007 highs after recovering only about 60% of decline since then and despite new all-time highs in S&P 500, Dow 30, and Value Line index.

CPFL on both Daily and Weekly cycles reached new short to intermediate-term highs last week, but indicator is nowhere near major resistance high made week of February 25, 2011. Weekly CPFL has only retraced about 60% of its long-term decline since early 2007 high, despite on-balance strength since December 2011.

Cumulative Volume (CV) in S&P 500 and S&P Emini eked out new highs last week, but both have underperformed S&P since November intermediate-term lows.

So were we wrong in suggesting market highs might soon develop? Yes, to the extent we were surprised higher highs followed. But not from a strategic point-of-view. First, we did not and have not recommended long-term sales. Second, no short sales have been suggested. Put another way, “top fishing” is no less treacherous in a bull trend than “bottom fishing” is in a bear market. For the investor who sold too early the pain suffered has been merely lost opportunity. But for the investor who sold short, higher market prices have become increasingly problematic. That market player must adjust to the fact an error has been made, that he is losing money, and that he must either cover the short position or deny reality and try to wait it out. That latter stance could result in unlimited losses if the uptrend continues.

From our vantage point here in the bunker, we would much rather give a little on the downside once a major top has been made to see how the next smaller Intermediate Cycle plays out. That has been our strategy since the November 16 intermediate lows (S&P 500—1343.35). Since then there have been three meaningful short-term pullbacks (December 1-31; February 19-26; and April 11-18). But none was strong enough to seriously threaten the dominant Intermediate Cycle. That denial of larger cycle negativity with short-term strength could continue.